Can New Chinese Investor Boost Cargolux?

Cargolux has a new investor from China with big plans, but can the deal really work?

Initially, it looked like a good move for struggling freight carrier Cargolux that China's Henan Civil Aviation & Investment Co. (HCNA) bought a 35% stake in it last month. It seemed to open new opportunities in a fast-growing market for an airline that only recently had to be bailed out by the Luxembourg government. But now the deal is creating tensions on both sides, raising further doubt about the future of what still is one of Europe's most important cargo carriers.

At home, unions and politicians are concerned that the Luxembourg base will suffer as a result of plans for the airline to support an emerging Chinese freight hub. In China, the airline might face problems if government-owned incumbent carriers decide to fight back, industry officials say.

Cargolux's recent history has been tumultuous: In 2011, Qatar Airways bought a 35% stake in the already struggling company. Following multiple disputes over strategy and fleet planning, Qatar threw in the towel a year later, selling the stake back to the Luxembourg government.

The freight carrier's biggest problem, however, is finding a viable business case for an all-cargo operation at a time when the global demand for air freight is still rock bottom and belly capacity in passenger jets is growing. Also, unlike Lufthansa Cargo, Cargolux does not have a network of passenger aircraft to feed its freighters, so it operates point-to-point services, a practice that is difficult to sustain. In addition, its fleet composition makes the airline vulnerable: The nine Boeing 747-8Fs in particular can be filled only on a limited number of routes.

Cargolux does have some factors working in its favor. For one, European freight forwarders do not want to see it fail, as it is one of only a few alternatives in a region dominated by Lufthansa Cargo, which the forwarder community resents for its arrogance. Cargolux's management is not only well-liked and respected but it has kept the carrier afloat despite the revolving door of investors, continuing troubles with the unions and the imprisonment of two executives in the U.S. for price-fixing.

Following the Qatar stake debacle, the Luxembourg government is trying its luck with a Chinese investor. Cargolux will apply for traffic rights to Zhengzhou Airport (CGO) in March, open an office there soon after and start flights by the end of April under a $231 million deal that is part of China's goal to turn Zhengzhou into Asia's aviation equivalent of Dubai.

In Luxembourg, the sale immediately provoked protests from unions, which described it as “disastrous” and having “dire consequences” for both the airline and the country, while the airline's management and freight-forwarder customers made similar behind-the-scenes objections.

“Cargolux is obliged to serve the interests of HCNA and Henan Province without apparent consideration for the airport in Luxembourg,” the OGBL union said. “Entering the Chinese market could have short-term positive effects, but at the expense of a strategic long-term approach . . . once the Chinese partners have received the know-how or the personnel and equipment through joint-ventures, which would allow them to compete with Cargolux.”

Cargolux refused to comment other than saying that “it is normal that the unions have their own perception and interpretation of the deal.”

One senior industry executive says the Chinese deal is simply the latest in a string of “stupid decisions” the Luxembourg government has made trying to find investors for the airline. “They've never found an investor whose first and only priority was Cargolux. Lufthansa only bought into it in 1987 to make itself better,” the executive says. “Then Swissair had limited success because freighters weren't allowed into Zurich and there was no way of operating them out of Basel.

“Once Swissair went bankrupt, its shares in Cargolux eventually ended up with Qatar, which was another example of Luxembourg not doing their homework,” the executive continues. “They were expecting [Qatar Airways CEO Akbar Al Baker] to come in with the money, sit there passively and let Cargolux do its own thing, which, if you know him, he obviously was never going to do.”

The Henan deal was orchestrated on the Chinese side by Robert Song, a former AirBridge Cargo executive turned consultant. He left AirBridge amid rumours of alleged wrongdoing. In China, Song is advising the central and multiple regional governments on various aviation projects, notably the Zhengzhou aerotropolis. He has reportedly told media that there is no profit investing in an airline, but only on the ground in airports. Despite the implication that Cargolux's well-being would not be a high priority for the regional government, the deal still went ahead.

Song tells Aviation Week he was confident he would prove the naysayers wrong. “This deal is the best outcome and partnership for both sides,” he says. “There is no doubt that this will be great business for Cargolux and the region, and we have absolute confidence that Zhengzhou will be one of the largest cargo hubs in China in the years to come.”

The Luxembourg government and HCNA have reached agreement about how the company will grow in the long term, he says, and that applies to Luxembourg airport as well, which is operating at half cargo-handling capacity. “We aren't just looking at cargo being sourced from the Henan region. The aerotropolis concept means cargo will be sourced from all over China and consolidated at [Zhengzhou]. Whatever amount cargo grows at [Zhengzhou] means there will be an incremental increase for Cargolux and Luxembourg.”

That view is contested, however. China's current cargo king is Shanghai, which has just launched a free-trade zone that will compete with Zhengzhou's aerotropolis, a project that is not even set for completion until 2025. That leaves Cargolux with a long wait and strong, ongoing competition before it starts to see any boost in business.

Industry sources also suggest that the politics of a foreign airline operating in China could lead to inevitable problems. “The deal will [fail] within 12 to 18 months,” says one industry insider. “Look at Jade Cargo, Lufthansa's joint venture with the private airline Shenzhen Airlines. China didn't want Jade to succeed.” The airline has long been shut down over shareholder disagreements about funding. Shenzhen is owned by Air China. But Song is dismissive of the idea that Cargolux will be that much of a threat. “Why can't Cargolux compete with the national carriers? The Chinese market is so big that no one company can serve it.”

There is also the challenge of trying to sell a service that involves trucking cargo to and from primary and secondary hubs, as Luxembourg is to Frankfurt and Amsterdam, when carriers such as Lufthansa Cargo can fly to them directly. “They are going to have to price cheaply to compete, and that will just result in poor service and ruin Cargolux's reputation,” the industry executive says.

As for the eventual leadership of Cargolux, the deal will give HCNA three seats on the board, but despite rumors to the contrary, Song says he is not interested in becoming the airline's new CEO.